‘Caught up in their own hype’

Energy industry looks to government to save profits

For nearly a decade, the natural gas industry has drained valuable water resources, poisoned the land with dangerous chemicals, released radiation into water supplies and increased the danger of global warming through its unconventional drilling method known as hydraulic fracturing, fracking for short.

To get away with this environmental destruction the energy industry unleashed a massive public relations campaign promoting fracking as a source of cheap natural gas needed to make the U.S. “energy independent.”

Potential investors were lured with the promise of “100-year supplies” of natural gas in formations like the Marcellus Shale in the northeastern U.S. and the Barnett Shale in the Southwest. Politicians were bought off by the dozens to pave the way for unfettered drilling with limited oversight.

Now the industry, caught up in their own hype, faces a crisis brought on by the capitalist economic system, where production goals always put profit before human need. Concerns over environmental destruction did not deter drilling. Concerns over the impact of overproduction on profit margins, however, may be the real game changer.

Three events combined to cut the industry’s profit potential. Overproduction of natural gas started with a drilling surge from 2005 to 2008; this caused prices to nose dive. The economic recession that started in 2008 also diminished demand for natural gas. The high cost of the hydraulic fracturing technology needed to extract natural gas cut into profits.

Shale gas drilling needed higher natural gas prices to remain profitable. The International Energy Agency in 2010 estimated the production cost for shale gas between $4 and $9 per thousand cubic feet (Mcf), not counting lease costs. Prior to 2008, natural gas sold for over $13 per Mcf. By April 2012, the price dropped to around $2 per Mcf. (Foodandwaterwatch.org, November 2012)

The severe drop in U.S. market prices has left the top 50 energy companies, with fracking investments averaging $126 billion per year since 2006, unable to cover production costs.

After years of making huge investments, many corporations now find their lease assets far less lucrative than promised. ExxonMobil became the largest producer of natural gas in the U.S. when it purchased Texas based XTO Energy in 2010. Two years later, reacting to the price drop, XTO Energy’s CEO, Rex Tillerson, said: “We are all losing our shirts today. … It’s all in the red.” (Foodandwaterwatch.org, Nov. 11, 2012)

To add to the drillers’ dilemma, many companies must actively drill or forfeit their leases. Landowners, anticipating hefty royalty checks, find payments decreasing in amount and then stopping altogether. Some energy companies deduct production costs from royalty payments. Some leaseholders have received bills, asking for payment, instead of checks.

In the casino world of venture capitalism, investors are faced with the decision whether to hold or to fold. Many are backing out of investments.

In the first half of 2013, oil and gas investments in North America dropped 52 percent with massive write-offs in shale. Eighteen months after buying Chesapeake Energy’s shale assets in Fayetteville, Ark., the Australian multinational BHP Billiton wrote off more than 50 percent of the purchase price. Shell also sold off 50 percent of their shale assets. Private equity investment in shale have dropped 90 percent since 2012. (Energypolicyforum.org, Oct. 1)

From gas to oil

From 2000 to 2009, three-quarters of all drilling rigs in the U.S. were extracting natural gas. In 2009, drilling operations moved to the Bakken formation in North Dakota and the Eagle Ford Field in Texas to drill for oil. By August 2012, 75 percent of drilling rigs were fracking for oil.

The industry hoped to take advantage of the higher price of oil while biding their time until natural gas prices increased. Even this strategy caused problems. An analysis by the Canadian firm Global Sustainability Research found accessible oil in these formations declining at the rate of 40 percent per year. (Science News, Oct. 28)

With the cost to drill for shale oil up to $85 per barrel, fracking for oil proved less profitable than anticipated since the market price averaged only $69 per barrel. In August 2013, Royal Dutch Shell, which had shifted drilling activity from shale gas to oil, wrote off $2 billion in oil lease assets.

Government to the rescue

With the glut of natural gas pushing profits down and driving investors to dump their holdings, there is increased industry pressure on the federal government to come to the owners’ rescue.

U.S. corporations know they can count on government intervention when they get into trouble. The Federal Reserve bailed the banks out after the subprime mortgage crisis. Auto industry giants got government assistance to restructure and rob workers of their benefits.

The energy industry has long enjoyed a partnership with government officials on every level. To guarantee the continuance of $24 billion in federal tax subsidies, energy corporations invested over $30 million in congressional campaign contributions from 1989 to 2012. (desmogblog.com, November 2012)

The gas and oil industry’s close partnership with politicians has also been a major factor limiting government investment in renewable, non-fossil, alternative energy sources.

While Congress exempted fracking from government oversight through a loophole in the Energy Policy Act of 2005, being free from government supervision does not stop the energy industry from turning to regulatory agencies when it fits their needs. In 2009, under pressure from the industry, the Securities and Exchange Commission relaxed rules on how companies count reserve acres for drilling.

Originally, only gas near active wells (sweet spots) could be considered “proved” reserves and reported to potential investors. The relaxed rule let companies include reserves located farther from producing wells in their estimates. The SEC nixed a requirement that companies have independent auditors investigate their claims.

Overnight, some companies increased estimated reserves by up to 200 percent. While actual production costs did not drop, by averaging them over an increased reserve base, the estimated cost to drill each well dramatically declined. Five shale gas companies reported drops from 48 to 86 percent in production costs per well.

The SEC ruling let companies hide the actual field production costs by making their prospects look better. The change sent companies’ stocks soaring and brought more investors on board.

Should opposition to fracking get too strong in the U.S., the State Department launched its “Global Shale Gas Initiative” in August 2010 to promote exploration for shale gas by U.S. corporations in other countries.

Push for export

The low price of natural gas in the U.S. has also led to an increased push by the energy industry for the Department of Energy to ease restrictions on export of liquid gas to global markets where prices remain considerable higher. By 2012, there were 19 applications for export of natural gas, which if approved, would equal over 40 percent of domestic consumption. (Foodandwaterwatch.org Nov. 1, 2012)

The question is not if these permits will be approved by a pro-business government but when, and what impact this will have. After nearly a decade of pushing for U.S. dependence on cheap natural shale gas to fuel transportation and electricity, competition with global demand is guaranteed to drive domestic prices up. This will mean increased hardship on municipalities that converted facilities to use natural gas and on households that rely on natural gas for heat.

The export of natural gas would also unleash a new fracking frenzy. The anti-fracking movement needs to be prepared for this and willing to take on not just the natural gas industry but the whole greedy capitalist system.